DBRS Morningstar Confirms Ratings of Hydro One Inc. at A (high)/R-1 (low), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debentures rating of Hydro One Inc. (HOI or the Company) at A (high) and the Commercial Paper rating at R-1 (low). All trends are Stable. The ratings of HOI are based on its regulated transmission and distribution operations under the Ontario Energy Board, which provide a steady stream of income and cash flow. The Stable trend reflects HOI's key credit metrics, which are reasonable for the current ratings.

In August 2021, HOI filed its first Joint Rate Application (JRAP) for approval of its 2023 to 2027 transmission revenue requirement and distribution rates. The application is largely a continuation of the previous approvals under the Custom Incentive Rate-making framework whereby the revenues requirements are determined under cost-of-service for the first year with subsequent annual increases calculated by a revenue cap index based on inflation, productivity, stretch, and capital factors. DBRS Morningstar notes that, once approved, the JRAP will provide stability for HOI as well as certainty of funding for its large capital expenditures (capex) program ($7.6 billion for its transmission business and $5.6 billion for its distribution business over the five-year term). A decision is expected by the end of 2022.

In 2021, HOI's key credit metrics remained supportive of the current ratings. The Company's cash flow-to-debt ratio improved following the dip in 2020 because of the timing of a debt issuance to refinance an upcoming maturity. HOI's financial risk profile is expected to remain reasonable in 2022, but DBRS Morningstar notes that key credit metrics, especially the cash flow-to-debt ratio, may become pressured over the medium term because of the significant capex program. DBRS Morningstar expects the Company to fund its capex and dividend requirements through a prudent mix of debt issuances and operating cash flows in order to maintain leverage in line with the regulatory capital structure and other key ratios within the "A" rating category. A negative rating action may occur if HOI's key credit metrics weaken to a level no longer commensurate with the current rating category for a sustained period, such as if the cash flow-to-debt ratio falls below 12.5% and the debt-to-capital ratio increases above 60.0%. A positive rating action is considered unlikely over the medium term given the Company's current business and financial risk profiles and the substantial capex program.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Regulated Electric, Natural Gas, and Water Utilities Industry (September 24, 2021; https://www.dbrsmorningstar.com/research/384922) and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 1, 2022, https://www.dbrsmorningstar.com/research/393065), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021, https://www.dbrsmorningstar.com/research/373262).

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrsmorningstar.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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